Carriage Services, Inc.
CARRIAGE SERVICES INC (Form: 10-Q, Received: 05/08/2013 06:01:52)
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 1-11961
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
76-0423828
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
3040 Post Oak Boulevard, Suite 300
Houston, Texas, 77056
(Address of principal executive offices)
(713) 332-8400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of May 3, 2013 was 18,208,541.



Table of Contents

CARRIAGE SERVICES, INC.
INDEX
 

Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

- 2 -

Table of Contents

PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
 
(unaudited)
 
December 31, 2012
 
March 31, 2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,698

 
$
1,290

Accounts receivable, net of allowance for bad debts of $1,177 in 2012 and $1,016 in 2013
17,812

 
18,142

Assets held for sale
1,466

 
3,183

Inventories
5,133

 
5,010

Prepaid expenses
5,107

 
4,138

Other current assets
1,923

 
4,107

Total current assets
33,139

 
35,870

Preneed cemetery trust investments
70,960

 
73,067

Preneed funeral trust investments
82,896

 
85,224

Preneed receivables, net of allowance for bad debts of $2,059 in 2012 and $1,851 in 2013
23,222

 
24,181

Receivables from preneed trusts
25,871

 
26,938

Property, plant and equipment, net of accumulated depreciation of $84,291 in 2012 and $85,361 in 2013
152,433

 
155,677

Cemetery property
75,156

 
75,030

Goodwill
218,442

 
217,243

Deferred charges and other non-current assets
9,424

 
7,156

Cemetery perpetual care trust investments
46,542

 
47,165

Total assets
$
738,085

 
$
747,551

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of senior long-term debt and capital lease obligations
$
11,218

 
$
11,629

Accounts payable
5,243

 
4,359

Other liabilities
13,067

 
14,346

Accrued liabilities
12,278

 
11,671

Liabilities associated with assets held for sale
369

 
578

Total current liabilities
42,175

 
42,583

Long-term debt, net of current portion
118,841

 
115,718

Line of credit
44,700

 
43,000

Convertible junior subordinated debentures due in 2029 to an affiliate
89,770

 
89,770

Obligations under capital leases, net of current portion
4,013

 
3,943

Deferred preneed cemetery revenue
63,998

 
64,627

Deferred preneed funeral revenue
39,794

 
41,846

Deferred preneed cemetery receipts held in trust
70,960

 
73,067

Deferred preneed funeral receipts held in trust
82,896

 
85,224

Care trusts’ corpus
45,920

 
47,083

Total liabilities
603,067

 
606,861

Commitments and contingencies:

 

Redeemable preferred stock
200

 
200

Stockholders’ equity:
 
 
 
Common stock, $.01 par value; 80,000,000 shares authorized; 22,078,000 and 22,053,000 shares issued at December 31, 2012 and March 31, 2013, respectively
221

 
221

Additional paid-in capital
202,462

 
202,880

Accumulated deficit
(52,598
)
 
(47,344
)
Treasury stock, at cost; 3,922,000 shares at December 31, 2012 and March 31, 2013
(15,267
)
 
(15,267
)
Total stockholders’ equity
134,818

 
140,490

Total liabilities and stockholders’ equity
$
738,085

 
$
747,551

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)

For the three months ended March 31,

2012
 
2013
Revenues:
 
 
 
Funeral
$
40,035

 
$
45,157

Cemetery
11,288

 
12,930

 
51,323

 
58,087

Field costs and expenses:
 
 
 
Funeral
22,959

 
26,421

Cemetery
7,182

 
7,228

Depreciation and amortization
2,158

 
2,496

Regional and unallocated funeral and cemetery costs
2,333

 
3,264

 
34,632

 
39,409

Gross profit
16,691

 
18,678

Corporate costs and expenses:
 
 
 
General and administrative costs and expenses
5,242

 
5,775

Home office depreciation and amortization
253

 
343

 
5,495

 
6,118

Operating income
11,196

 
12,560

Interest expense, net of other income
(4,552
)
 
(2,595
)
Income from continuing operations before income taxes
6,644

 
9,965

Provision for income taxes
(2,574
)
 
(4,384
)
Net income from continuing operations
4,070

 
5,581

Income (loss) from discontinued operations, net of tax
389

 
(323
)
Net income
4,459

 
5,258

Preferred stock dividend
(4
)
 
(4
)
Net income available to common stockholders
$
4,455

 
$
5,254

 
 
 
 
Basic earnings per common share:
 
 
 
Continuing operations
$
0.22

 
$
0.31

Discontinued operations
0.02

 
(0.02
)
Basic earnings per common share
$
0.24

 
$
0.29

Diluted earnings per common share:
 
 
 
Continuing operations
$
0.22

 
$
0.27

Discontinued operations
0.02

 
(0.02
)
Diluted earnings per common share
$
0.24

 
$
0.25

 
 
 
 
Dividends declared per common share
$
0.025

 
$
0.025

Weighted average number of common and common equivalent shares outstanding:
 
 
 
Basic
18,265

 
18,139

Diluted
18,320

 
22,728

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.


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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
For the three months ended March 31,
 
2012
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
4,459

 
$
5,258

Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
 
(Income) loss from discontinued operations
(389
)
 
323

Depreciation and amortization
2,412

 
2,839

Amortization of deferred financing costs
174

 
(638
)
Provision for losses on accounts receivable
486

 
440

Stock-based compensation expense
403

 
646

Deferred income taxes
2,104

 
1,354

Other
(10
)
 

Changes in operating assets and liabilities that provided (required) cash:
 
 
 
Accounts and preneed receivables
(1,240
)
 
(1,966
)
Inventories and other current assets
(118
)
 
501

Deferred charges and other
(38
)
 

Preneed funeral and cemetery trust investments
2,305

 
1,411

Accounts payable and accrued liabilities
(5,310
)
 
(48
)
Deferred preneed funeral and cemetery revenue
182

 
2,678

Deferred preneed funeral and cemetery receipts held in trust
(2,270
)
 
(1,935
)
Net cash provided by continuing operating activities
3,150

 
10,863

Net cash provided by discontinued operating activities
373

 
122

Net cash provided by operating activities
3,523

 
10,985

Cash flows from investing activities:
 
 
 
Acquisitions
(11,589
)
 

Capital expenditures
(3,090
)
 
(8,711
)
Net cash used in continuing investing activities
(14,679
)
 
(8,711
)
Net cash provided by discontinued investing activities
9

 
1,928

Net cash used in investing activities
(14,670
)
 
(6,783
)
Cash flows from financing activities:
 
 
 
Net borrowings from (payments against) the bank credit facility
13,900

 
(4,200
)
Payments on long-term debt and obligations under capital leases
(164
)
 
(160
)
Proceeds from the exercise of stock options and employee stock purchase plan
318

 
318

Stock option benefit
21

 

Dividends on common stock
(454
)
 
(452
)
Dividend on redeemable preferred stock
(4
)
 
(4
)
Payment of loan origination costs

 
(98
)
Purchase of treasury stock
(2,731
)
 

Net cash provided by (used in) continuing financing activities
10,886

 
(4,596
)
Net cash used in discontinued financing activities
(7
)
 
(14
)
Net cash provided by (used in) financing activities
10,879

 
(4,610
)
Net decrease in cash and cash equivalents
(268
)
 
(408
)
Cash and cash equivalents at beginning of period
1,137

 
1,698

Cash and cash equivalents at end of period
$
869

 
$
1,290

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

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CARRIAGE SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage”, the “Company”, “we”, “us” or “our”) is a leading provider of deathcare services and merchandise in the United States. As of March 31, 2013 , we owned and operated 167 funeral homes in 26 states and 33 cemeteries in 11 states.
Principles of Consolidation
The accompanying Consolidated Financial Statements include us and our subsidiaries. All significant intercompany balances and transactions have been eliminated.
Interim Condensed Disclosures
The information for the three month periods ended March 31, 2012 and 2013 is unaudited, but in the opinion of management, reflects all adjustments which are normal, recurring and necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. The accompanying Consolidated Financial Statements have been prepared consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2012 and should be read in conjunction therewith. Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance that our results of operations will be consistent from year to year.
Funeral and Cemetery Operations
We record the revenue from sales of funeral and cemetery merchandise and services when the merchandise is delivered or the service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract price related to the interment right. Costs related to the sales of interment rights, which include real property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenues to be recognized from the delivery of merchandise and performance of services related to contracts that were acquired in acquisitions are typically lower than those originated by the Company. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience and the current economic environment. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed sales of funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance

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commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued.
Accounts receivable included approximately $8.4 million and $8.7 million of funeral receivables at December 31, 2012 and March 31, 2013 , respectively, and $9.2 million and $8.9 million of cemetery receivables at December 31, 2012 and March 31, 2013 , respectively. Non-current preneed receivables represent the payments expected to be received beyond one year from the balance sheet date. Non-current preneed receivables consisted of approximately $7.3 million and $7.5 million of funeral receivables and $15.9 million and $16.7 million of cemetery receivables at December 31, 2012 and March 31, 2013 , respectively. Accounts receivable also include minor amounts of other receivables. Bad debt expense totaled $0.5 million and $0.4 million for three months ended March 31, 2012 and 2013 , respectively.
Discontinued Operations
In accordance with our Strategic Acquisition Model, non-strategic businesses are reviewed to determine whether such businesses should be sold and the proceeds redeployed elsewhere. A marketing plan is then developed for those locations which are identified as held for sale. When we receive a letter of intent and financing commitment from a buyer and the sale is expected to occur within one year , the location is no longer reported within our continuing operations. The assets and liabilities associated with the location are reclassified as held for sale on the Consolidated Balance Sheet and the operating results, as well as impairments, if any, are presented on a comparative basis in the discontinued operations section of the Consolidated Statements of Operations, along with the income tax effect. During the first quarter of 2013, we sold funeral homes in Texas which were reported as held for sale at December 31, 2012. We currently have new letters of intent outstanding on funeral homes in Kansas and California; as such, these businesses are no longer reported within our continuing operations. The assets and liabilities associated with the locations are reclassified as held for sale on the Consolidated Balance Sheet and the operating results are presented on a comparative basis in the discontinued operations section of the Consolidated Statements of Operations. See Note 4 to the Consolidated Financial Statements herein for more information.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date of an acquisition subsequently becomes available during the allocation period, we may adjust goodwill, assets, or liabilities associated with such acquisition. Acquisition related costs are recognized separately from acquisitions and are expensed as incurred. During the first quarter of 2012, we completed two acquisitions. There were no acquisitions during the first quarter of 2013. See Note 3 to the Consolidated Financial Statements herein for more information.
The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral businesses. Goodwill is tested for impairment by assessing the fair value of each of our reporting units. The funeral segment reporting units consist of our East, Central and West regions in the United States, and we perform our annual impairment test of goodwill using information as of August 31 of each year. In addition, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results.
Our methodology for goodwill impairment testing is described in more detail in Notes 1 and 5 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we may grant restricted stock, stock options, performance awards and employee stock purchase plans, which are described in more detail in Note 17 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012 . We recognize compensation expense in an amount equal to the fair value of the share-based awards expected to vest over the requisite service period. Fair value is determined on the date of the grant. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards is determined using a Monte-Carlo simulation pricing model. See Note 14 to the Consolidated Financial Statements herein for additional information on our stock-based compensation plans.

- 7 -


Computation of Earnings Per Common Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and convertible junior subordinated debentures.
Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities and we have prepared our earnings per share calculations to include outstanding unvested restricted stock awards in both the basic and diluted weighted average shares outstanding calculation. See Note 19 to this Consolidated Financial Statements herein for the computations of per share earnings for the three month periods ended March 31, 2012 and 2013 .
The fully diluted weighted average shares outstanding for the three months ended March 31, 2013, and the corresponding calculation of GAAP fully diluted earnings per share include approximately 4.4 million shares that would be issued upon conversion of our convertible junior subordinated debentures as a result of the application of the if-converted method prescribed by FASB ASC 260-10-45. For the three months ended March 31, 2012, the conversion of our convertible junior subordinated debentures is excluded from fully diluted earnings per share calculations and the fully diluted weighted average share count because the inclusion of such converted shares would result in an antidilutive impact.
Preneed Funeral and Cemetery Trust Funds
Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIEs”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts. For these reasons, we have recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus . The investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus in our Consolidated Balance Sheets. Our future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not required to be placed in trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenue until the service is performed or the merchandise is delivered.
In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment/entombment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide care and maintenance for the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds.
An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE, or the right to receive benefits from the entity that could potentially be significant to the VIE. Our analysis continues to support our position as the primary beneficiary in certain of our funeral and cemetery trust funds.
Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (CSV RIA). As of March 31, 2013 , CSV RIA provides these services to one institution, which has custody of 68% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.

- 8 -


Fair Value Measurements
We define fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. Additional required disclosures are provided herein in Notes 6, 10 and 11 to the Consolidated Financial Statements. We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
To determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased, the exit price is used as the fair value measurement. For the three month period ended March 31, 2013 , we did not incur significant decreases in the volume or level of activity of any asset or liability. We consider an impairment of debt and equity securities other-than-temporary unless (a) the investor has the ability and intent to hold an investment and (b) evidence indicating the cost of the investment is recoverable before we are more likely than not required to sell the investment. If impairment is indicated, then an adjustment is made to reduce the carrying amount to fair value. As of March 31, 2013 , no impairments have been identified.
In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in fair market values related to outstanding debts and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. Our convertible junior subordinated debentures, payable to Carriage Services Capital Trust (the “Trust”), pay interest at the fixed rate of 7% and are carried on our Consolidated Balance Sheets at a cost of approximately $89.8 million . The fair value of these securities is estimated to be approximately $95.2 million at March 31, 2013 , based on available broker quotes of the corresponding preferred securities issued by the Trust.
Income Taxes
We and our subsidiaries file a consolidated U.S. Federal income tax return, separate income tax returns in 16 states and combined or unitary income tax returns in 11 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities.  We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain.  Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheets.  We have reviewed our income tax positions and identified certain tax deductions, primarily related to business acquisitions that are not certain.  Our policy with respect to potential penalties and interest is to record them as “Other” expense and “Interest” expense, respectively.  The entire balance of unrecognized tax benefits, if recognized, would affect our effective tax rate.  We do not anticipate a significant increase or decrease in our unrecognized tax benefits during the next twelve months.
Subsequent Events
Management evaluated events and transactions during the period subsequent to March 31, 2013 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report. For more information regarding subsequent events, see Note 20 to the Consolidated Financial Statements herein.
2.
RECENTLY ISSUED ACCOUNTING STANDARDS
Comprehensive Income
In February 2013, the FASB amended the Comprehensive Income Topic of the ASC to require reporting of amounts reclassified out of accumulated other comprehensive income (AOCI) by component. In addition, we are required to present significant amounts reclassified out of AOCI to net income in its entirety by the respective line items and to cross reference any disclosure elsewhere in the notes for amounts reclassified in less than their entirety. This amendment is effective prospectively for public companies for reporting periods after December 15, 2012 which we adopted effective January 1, 2013. See Note 15 to the Consolidated Financial Statements herein for the appropriate disclosures.

- 9 -


3.
ACQUISITIONS
Our growth strategy includes the execution of our Strategic Acquisition Model. We assess acquisition candidates using six strategic ranking criteria to differentiate the price we are willing to pay under a discounted cash flow methodology. Those criteria are:
Size of business;
Size of market;
Competitive standing;
Local market demographics;
Strength of brand; and
Barriers to entry.
During the first quarter of 2012 , we completed two acquisitions consisting of two funeral homes. We paid $11.6 million in cash as consideration for these acquisitions. We acquired substantially all of the assets and assumed certain operating liabilities, including obligations associated with existing preneed contracts. The assets and liabilities were recorded at fair value and included goodwill of $6.3 million . There were no acquisitions during the first quarter of 2013 . The pro forma impact of the acquisition on the prior periods is not presented as the impact is not material to reported results. Thus, the results of the acquired businesses are included in our results from the date of acquisition.
4.
ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
We continually review locations to optimize the sustainable earning power and return on our invested capital. Our strategy, the Strategic Acquisition Model, also uses strategic ranking criteria to assess potential disposition candidates. The execution of this strategy entails selling generally non-strategic businesses.
During the first quarter of 2012, we ended a management agreement with a cemetery in Ohio. We currently have new letters of intent outstanding on funeral homes in Kansas and California; as such, these businesses are no longer reported within our continuing operations and are presented as held for sale on our Consolidated Balance Sheet at March 31, 2013 .
Assets and liabilities associated with the businesses held for sale in our Consolidated Balance Sheets at December 31, 2012 and March 31, 2013 consisted of the following (in thousands):
 
December 31, 2012
 
March 31, 2013
Assets:
 
 
 
Current assets
$
238

 
$
309

Preneed funeral trust investments

 
70

Receivables from preneed trusts
293

 
289

Property, plant and equipment, net
504

 
1,418

Goodwill
85

 
1,097

Deferred charges and other non-current assets
346

 

Total
$
1,466

 
$
3,183

 
 
 
 
Liabilities:
 
 
 
Current liabilities
$
75

 
$
106

Current portion of long-term debt and capital lease obligations

 
28

Long-term debt, net of current portion

 
85

Deferred preneed funeral revenue
294

 
289

Deferred preneed funeral receipts held in trust

 
70

Total
$
369

 
$
578


- 10 -


The operating results of the discontinued businesses during the periods presented, as well as the gain on the disposal, are presented in the discontinued operations section of the Consolidated Statements of Operations, along with the income tax effect as follows (in thousands):

For the three months ended March 31,

2012
 
2013
Revenues
$
977

 
$
658

 
 
 
 
Operating income
$
226

 
$
62

Gain (loss) on disposition
428

 
(583
)
(Provision) benefit for income taxes
(265
)
 
198

Income (loss) from discontinued operations
$
389

 
$
(323
)
5.
GOODWILL
Many of the former owners and staff of acquired funeral homes have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a funeral business. The excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in business acquisition transactions accounted for as purchases, is recorded as goodwill.
The following table presents the changes in goodwill in our Consolidated Balance Sheets (in thousands):

March 31, 2013
Goodwill as of December 31, 2012
$
218,442

Impairments and changes in previous estimates
(102
)
Reclassification of assets held for sale
(1,097
)
Goodwill as of March 31, 2013
$
217,243

Changes in previous estimates are related to minor adjustments to inventory. The impairment of $0.1 million is related to businesses discontinued in the first quarter of 2013 as the carrying value exceeded fair value.
6.
PRENEED TRUST INVESTMENT
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are generally permitted to withdraw when the merchandise or services are provided. The components of Preneed cemetery trust investments in our Consolidated Balance Sheets at December 31, 2012 and March 31, 2013 are as follows (in thousands):
 
December 31, 2012
 
March 31, 2013
Preneed cemetery trust investments, at fair value
$
73,126

 
$
75,213

Less: allowance for contract cancellation
(2,166
)
 
(2,146
)
Preneed cemetery trust investments, net
$
70,960

 
$
73,067

Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, we are obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded.
Earnings from our preneed cemetery trust investments are recognized in revenue when a service is performed or merchandise is delivered. Trust management fees charged by our wholly-owned registered investment advisor are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, common stock, U.S.treasury debt, U.S. agency obligations and equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that

- 11 -


can corroborate observable market data. These investments are corporate debt, preferred stocks, foreign debt, mortgage backed securities and fixed income securities, all of which are classified within Level 2 of the valuation hierarchy. There were no significant transfers between Levels 1 and 2 for the three months ended March 31, 2013.  There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 11 for further information of the fair value measurement and the three-level valuation hierarchy.
The cost and fair market values associated with preneed cemetery trust investments at March 31, 2013 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
922

 
$

 
$

 
$
922

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign
2
 
2,458

 
459

 

 
2,917

Corporate debt
2
 
39,164

 
1,453

 
(551
)
 
40,066

Preferred stock
2
 
19,142

 
1,394

 

 
20,536

Mortgage backed securities
2
 
1

 

 

 
1

Common stock
1
 
9,828

 
507

 
(907
)
 
9,428

Trust securities
 
 
$
71,515

 
$
3,813

 
$
(1,458
)
 
$
73,870

Accrued investment income
 
 
$
1,343

 
 
 
 
 
$
1,343

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
75,213

Fair market value as a percentage of cost
 
 
 
 
 
 
 
 
103.3
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$

Due in one to five years
9,949

Due in five to ten years
18,351

Thereafter
35,220

Total
$
63,520

The cost and fair market values associated with preneed cemetery trust investments at December 31, 2012 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
758

 
$

 
$

 
$
758

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign
2
 
2,008

 
450

 

 
2,458

Corporate debt
2
 
38,299

 
863

 
(507
)
 
38,655

Preferred stock
2
 
22,362

 
824

 
(294
)
 
22,892

Mortgage backed securities
2
 
1

 

 

 
1

Common stock
1
 
8,759

 
34

 
(1,526
)
 
7,267

Trust securities
 
 
$
72,187

 
$
2,171

 
$
(2,327
)
 
$
72,031

Accrued investment income
 
 
$
1,095

 
 
 
 
 
$
1,095

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
73,126

Market value as a percentage of cost
 
 
 
 
 
 
 
 
99.8
%
We determine whether or not the assets in the preneed cemetery trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction in Deferred preneed

- 12 -


cemetery receipts held in trust . There will be no impact on earnings unless and until such time as the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.
We have determined that the unrealized losses in our cemetery merchandise and service trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our cemetery merchandise and service trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of March 31, 2013 and December 31, 2012, respectively, are shown in the following tables (in thousands):
 
March 31, 2013
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
$
6,975

 
$
(240
)
 
$
528

 
$
(311
)
 
$
7,503

 
$
(551
)
Common stock
2,687

 
(738
)
 
920

 
(169
)
 
3,607

 
(907
)
Total temporary impaired securities
$
9,662

 
$
(978
)
 
$
1,448

 
$
(480
)
 
$
11,110

 
$
(1,458
)
 
December 31, 2012
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
11,363

 
(325
)
 
622

 
(182
)
 
11,985

 
(507
)
Preferred stock
1,040

 
(54
)
 
2,284

 
(240
)
 
3,324

 
(294
)
Common stock
5,088

 
(934
)
 
957

 
(592
)
 
6,045

 
(1,526
)
Total temporary impaired securities
$
17,491

 
$
(1,313
)
 
$
3,863

 
$
(1,014
)
 
$
21,354

 
$
(2,327
)
Preneed cemetery trust investment security transactions recorded in Interest income and other, net in the Consolidated Statements of Operations for the three months ended March 31, 2012 and 2013 are as follows (in thousands):

For the three months ended March 31,

2012
 
2013
Investment income
$
762

 
$
693

Realized gains
2,373

 
38

Realized losses
(115
)
 
(430
)
Expenses and taxes
(131
)
 
(381
)
Increase (decrease) in deferred preneed cemetery receipts held in trust
(2,889
)
 
80

 
$

 
$

Purchases and sales of investments in the preneed cemetery trusts were as follows (in thousands):

For the three months ended March 31,

2012
 
2013
Purchases
$
(24,039
)
 
$
(4,161
)
Sales
24,088

 
5,009


- 13 -

Table of Contents

Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by funds paid by the customer to us. Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw prior to our performance and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. The components of Preneed funeral trust investments in our Consolidated Balance Sheets at December 31, 2012 and March 31, 2013 are as follows (in thousands):
 
December 31, 2012
 
March 31, 2013
Preneed funeral trust investments, at fair value
$
85,415

 
$
87,728

Less: allowance for contract cancellation
(2,519
)
 
(2,504
)
Preneed funeral trust investments, net
$
82,896

 
$
85,224

Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, we are obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded.
Earnings from our preneed funeral trust investments are recognized in revenue when a service is performed or merchandise is delivered. Trust management fees charged by our wholly-owned registered investment advisor are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U. S. Government, agencies and municipalities, common stocks and equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are corporate debt, preferred stocks, foreign debt, mortgage backed securities and fixed income securities, all of which are classified within Level 2 of the valuation hierarchy. There were no significant transfers between Levels 1 and 2 for the three months ended March 31, 2013.  There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 11 for further information of the fair value measurement and the three-level valuation hierarchy.

- 14 -

Table of Contents

The cost and fair market values associated with preneed funeral trust investments at March 31, 2013 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
13,613

 
$

 
$

 
$
13,613

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. treasury debt
1
 
2,923

 
86

 

 
3,009

U.S. agency obligations
1
 
636

 
18

 
(36
)
 
618

Foreign
2
 
1,477

 
276

 

 
1,753

Corporate debt
2
 
25,292

 
1,039

 
(360
)
 
25,971

Preferred stock
2
 
12,985

 
1,100

 

 
14,085

Mortgage backed securities
2
 
1

 

 

 
1

Common stock
1
 
6,566

 
358

 
(588
)
 
6,336

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
11,559

 
1,474

 
(23
)
 
13,010

Fixed income
2
 
6,170

 
170

 
(68
)
 
6,272

Other investments
2
 
2,255

 

 
(14
)
 
2,241

Trust securities
 
 
$
83,477

 
$
4,521

 
$
(1,089
)
 
$
86,909

Accrued investment income
 
 
$
819

 
 
 
 
 
$
819

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
87,728

Fair market value as a percentage of cost
 
 
 
 
 
 
 
 
104.1
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
639

Due in one to five years
8,164

Due in five to ten years
12,712

Thereafter
23,922

Total
$
45,437



- 15 -

Table of Contents

The cost and fair market values associated with preneed funeral trust investments at December 31, 2012 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
13,448

 
$

 
$

 
$
13,448

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. treasury debt
1
 
3,001

 
75

 

 
3,076

U.S agency obligations
1
 
142

 
4

 

 
146

Foreign
2
 
1,217

 
273

 

 
1,490

Corporate debt
2
 
25,060

 
661

 
(331
)
 
25,390

Preferred stock
2
 
15,228

 
715

 
(193
)
 
15,750

Common stock
1
 
5,770

 
27

 
(996
)
 
4,801

Mutual funds:

 
 
 
 
 
 
 
 
Equity
 
 
11,843

 
487

 
(78
)
 
12,252

Fixed income
1
 
6,105

 
181

 
(40
)
 
6,246

Other investments
2
 
2,143

 

 
(15
)
 
2,128

Trust securities
2
 
$
83,957

 
$
2,423

 
$
(1,653
)
 
$
84,727

Accrued investment income
 
 
$
688

 
 
 
 
 
$
688

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
85,415

Market value as a percentage of cost
 
 
 
 
 
 
 
 
100.9
%
We determine whether or not the assets in the preneed funeral trusts have other-than-temporary impairments on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral receipts held in trust . There will be no impact on earnings unless and until such time as the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.
We have determined that the unrealized losses in our preneed funeral trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of March 31, 2013 and December 31, 2012, respectively, are shown in the following tables (in thousands):
 
March 31, 2013
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations
$
12

 
$

 
$
231

 
$
(36
)
 
$
243

 
$
(36
)
Corporate debt
4,551

 
(157
)
 
344

 
(203
)
 
4,895

 
(360
)
Common stock
1,742

 
(479
)
 
597

 
(109
)
 
2,339

 
(588
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
17

 

 
570

 
(23
)
 
587

 
(23
)
Fixed income
2,909

 
(68
)
 

 

 
2,909

 
(68
)
Other investments

 

 
31

 
(14
)
 
31

 
(14
)
Total temporary impaired securities
$
9,231

 
$
(704
)
 
$
1,773

 
$
(385
)
 
$
11,004

 
$
(1,089
)

- 16 -

Table of Contents

 
December 31, 2012
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
7,419

 
(212
)
 
406

 
(119
)
 
7,825

 
(331
)
Preferred stock
685

 
(35
)
 
1,504

 
(158
)
 
2,189

 
(193
)
Common stock
3,323

 
(609
)
 
625

 
(387
)
 
3,948

 
(996
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
1,613

 
(25
)
 
632

 
(53
)
 
2,245

 
(78
)
Fixed income
3,085

 
(40
)
 

 

 
3,085

 
(40
)
Other investments

 

 
30

 
(15
)
 
30

 
(15
)
Total temporary impaired securities
$
16,125

 
$
(921
)
 
$
3,197

 
$
(732
)
 
$
19,322

 
$
(1,653
)
Preneed funeral trust investment security transactions recorded in Interest income and other, net in the Consolidated Statements of Operations for the three months ended March 31, 2012 and 2013 are as follows (in thousands):

For the three months ended March 31,

2012
 
2013
Investment income
$
861

 
$
606

Realized gains
735

 
5,127

Realized losses
(449
)
 
(5,332
)
Expenses and taxes
(210
)
 
(248
)
Decrease in deferred preneed funeral receipts held in trust
(937
)
 
(153
)
 
$

 
$

Purchases and sales of investments in the preneed funeral trusts are as follows (in thousands):

For the three months ended March 31,

2012
 
2013
Purchases
$
(17,873
)
 
$
(3,186
)
Sales
18,174

 
3,915

7.
PRENEED CEMETERY RECEIVABLES
Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years with such interest income reflected as Preneed cemetery finance charges . In substantially all cases, we receive an initial down payment at the time the contract is signed. Occasionally, we offer zero percent interest financing to promote sales as limited-time offers. At March 31, 2013 , the balances of preneed receivables for cemetery interment rights and for merchandise and services were $21.3 million and $8.7 million , respectively, of which $10.3 million is presented in Accounts receivable and $19.7 million is presented in Preneed receivables . The unearned finance charges associated with these receivables were $3.3 million and $3.6 million at December 31, 2012 and March 31, 2013, respectively.

- 17 -

Table of Contents

We determine an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more, which was approximately 5.3% of the total receivables on recognized sales at March 31, 2013 . An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level.  For the three months ended March 31, 2013 , changes in the allowance for contract cancellations were as follows (in thousands):

March 31, 2013
Beginning balance
$
1,903

Write-offs and cancellations
(591
)
Provision
193

Ending balance
$
1,505

The aging of past due financing receivables as of March 31, 2013 is as follows (in thousands):
 
31-60
Past Due
 
61-90
Past Due
 
91-120
Past Due
 
>120
Past Due
 
Total Past
Due
 
Current
 
Total Financing
Receivables
Recognized revenue
$
556

 
$
268

 
$
177

 
$
930

 
$
1,931

 
$
19,047

 
$
20,978

Deferred revenue
169

 
113

 
84

 
453

 
819

 
8,258

 
9,077

Total contracts
$
725

 
$
381

 
$
261

 
$
1,383

 
$
2,750

 
$
27,305

 
$
30,055

8.
RECEIVABLES FROM PRENEED TRUSTS
The receivables from preneed trusts represent assets in trusts which are controlled and operated by third parties in which we do not have a controlling financial interest ( less than 50% ) in the trust assets. We account for these investments at cost. As of December 31, 2012 and March 31, 2013 , receivables from preneed trusts are as follows (in thousands):
 
December 31, 2012
 
March 31, 2013
Preneed trust funds, at cost
$
26,671

 
$
27,772

Less: allowance for contract cancellation
(800
)
 
(834
)
Receivables from preneed trusts, net
$
25,871

 
$
26,938

9.
CONTRACTS SECURED BY INSURANCE
Certain preneed funeral contracts are secured by life insurance contracts. Generally, the proceeds of the life insurance policies have been assigned to us and will be paid upon the death of the insured. The proceeds will be used to satisfy the beneficiary’s obligations under the preneed contract for services and merchandise. Preneed funeral contracts secured by insurance totaled $237.4 million and $272.6 million at December 31, 2012 and March 31, 2013 , respectively, and are not included in our Consolidated Balance Sheets.
10.
CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Care trusts’ corpus on our Consolidated Balance Sheets represent the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, 2012 and March 31, 2013 are as follows (in thousands):
 
December 31, 2012
 
March 31, 2013
Trust assets, at fair value
$
46,542

 
$
47,165

Obligations due to trust
(622
)
 
(82
)
Care trusts’ corpus
$
45,920

 
$
47,083

The income from these perpetual care trusts provides funds necessary to maintain cemetery property and memorials in perpetuity. This trust fund income is recognized, as earned, in cemetery revenues. Trust management fees charged by our wholly-owned registered investment advisor are included in revenue in the period in which they are earned.

- 18 -

Table of Contents

Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, common stock, U.S.treasury debt, U.S. agency obligations and equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are corporate debt, preferred stocks, foreign debt, mortgage backed securities and fixed income securities, all of which are classified within Level 2 of the valuation hierarchy. There were no significant transfers between Levels 1 and 2 for the three months ended March 31, 2013.  There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 11 for further information of the fair value measurement and the three-level valuation hierarchy.
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at March 31, 2013 (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
683

 
$

 
$

 
$
683

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign
2
 
1,527

 
286

 

 
1,813

Corporate debt
2
 
24,493

 
917

 
(346
)
 
25,064

Preferred stock
2
 
11,984

 
874

 

 
12,858

Mortgage backed securities
2
 
1

 

 

 
1

Common stock
1
 
6,143

 
317

 
(569
)
 
5,891

Trust securities

 
$
44,831

 
$
2,394

 
$
(915
)
 
$
46,310

Accrued investment income
 
 
$
855

 
 
 
 
 
$
855

Cemetery perpetual care trust investments
 
 
 
 
 
 
 
 
$
47,165

Fair market value as a percentage of cost
 
 
 
 
 
 
 
 
103.3
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$

Due in one to five years
6,233

Due in five to ten years
11,459

Thereafter
22,044

 
$
39,736

The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2012 (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
545

 
$

 
$

 
$
545

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign
2
 
1,267

 
284

 

 
1,551

Corporate debt
2
 
24,324

 
556

 
(323
)
 
24,557

Preferred stock
2
 
14,225

 
525

 
(187
)
 
14,563

Mortgage backed securities
2
 
1

 

 

 
1

Common stock
1
 
5,563

 
22

 
(969
)
 
4,616

Trust securities

 
$
45,925

 
$
1,387

 
$
(1,479
)
 
$
45,833

Accrued investment income
 
 
$
709

 
 
 
 
 
$
709

Cemetery perpetual care investments
 
 
 
 
 
 
 
 
$
46,542

Market value as a percentage of cost
 
 
 
 
 
 
 
 
99.8
%
We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. We determine whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the

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length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to Care trusts’ corpus .
We have determined that the unrealized losses in our perpetual care trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the period as of March 31, 2013 and December 31, 2012, respectively, are shown in the following tables (in thousands):
 
March 31, 2013
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
$
4,382

 
$
(151
)
 
$
332

 
$
(195
)
 
$
4,714

 
$
(346
)
Common stock
1,684

 
(463
)
 
577

 
(106
)
 
2,261

 
(569
)
Total temporary impaired securities
$
6,066

 
$
(614
)
 
$
909

 
$
(301
)
 
$
6,975

 
$
(915
)
 
December 31, 2012
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
 
Fair market value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
7,236

 
(207
)
 
396

 
(116
)
 
7,632

 
(323
)
Preferred stock
664

 
(34
)
 
1,459

 
(153
)
 
2,123

 
(187
)
Common stock
3,231

 
(593
)
 
608

 
(376
)
 
3,839

 
(969
)
Total temporary impaired securities
$
11,131

 
$
(834
)
 
$
2,463

 
$
(645
)
 
$
13,594

 
$
(1,479
)
Perpetual care trust investment security transactions recorded in Interest income and other, net in the Consolidated Statements of Operations for the three months ended March 31, 2012 and 2013 are as follows (in thousands):

For the three months ended March 31,

2012
 
2013
Undistributable realized gains
$
1,131

 
$
24

Undistributable realized losses
(52
)
 
(295
)
Increase in care trusts’ corpus
(1,079
)
 
271

 
$

 
$

Perpetual care trust investment security transactions recorded in Cemetery revenue for the three months ended March 31, 2012 and 2013 are as follows (in thousands):

For the three months ended March 31,

2012
 
2013
Interest and dividends
$
1,164

 
$
1,411

Realized gains

 
561

Expenses
(14
)
 
(163
)
Total
$
1,150

 
$
1,809


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Purchases and sales of investments in the perpetual care trusts were as follows (in thousands):

For the three months ended March 31,

2012
 
2013
Purchases
$
(16,217
)
 
$
(2,587
)
Sales
16,621

 
3,121

11.
FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date applicable for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date.
We evaluated our financial assets and liabilities for those financial assets and liabilities that met the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, trade receivables, and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. The long-term debt and line of credit are classified within Level 2 of the Fair Value Measurements hierarchy. The fair values of the long-term debt and line of credit approximate the carrying values of these instruments based on the index yields of similar securities compared to U.S. Treasury yield curves. The fair value of the convertible junior subordinated debentures is approximately $95.2 million at March 31, 2013 , based on available broker quotes of the corresponding preferred securities issued by the Trust. We identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual care trust investments categories on our Consolidated Balance Sheets as having met such criteria. See Notes 6 and 10 to this Consolidated Financial Statements herein for the fair value hierarchy levels of our trust investments.
The following three-level valuation hierarchy based upon the transparency of inputs is utilized in the measurement and
valuation of financial assets or liabilities as of the measurement date:
Level 1 – Fair value of securities based on unadjusted quoted prices for identical assets or liabilities in active markets. Our investments classified as Level 1 securities include cash, common stock, U.S.treasury debt, U.S. agency obligations and equity mutual funds.
Level 2 – Fair value of securities estimated based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation. These inputs include interest rates, yield curves, credit risk, prepayment speeds, rating, and tax-exempt status. Our investments classified as Level 2 securities include corporate debt, preferred stocks, foreign debt, mortgage backed securities, certain fixed income securities and fixed income mutual funds.
Level 3 – Unobservable inputs based upon the reporting entity’s internally developed assumptions which market participants would use in pricing the asset or liability. As of March 31, 2013 , we did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.
We account for our investments as available-for-sale and measure them at fair value under standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities.

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12.
LONG-TERM DEBT
The Company's senior long-term debt consisted of the following at December 31, 2012 and March 31, 2013 (in thousands):
 
December 31, 2012
 
March 31, 2013
Revolving credit facility, secured, floating rate
$
44,700

 
$
43,000

Term loan, secured, floating rate
127,500

 
125,000

Acquisition debt
2,427

 
2,187

Less: current portion
(11,086
)
 
(11,469
)
Total long-term debt
$
163,541

 
$
158,718

As of March 31, 2013 , we had a $235 million secured bank credit facility (the “Credit Facility”) with Bank of America, N.A. as Administrative Agent comprised of a $105 million revolving credit facility and a $130 million term loan. The Credit Facility also contains an accordion provision to borrow up to an additional $40 million in revolving loans, subject to certain conditions. The Credit Facility is set to mature on September 30, 2017 and is collateralized by all personal property and funeral home real property in certain states. Interest under the new Credit Facility is payable at prime or LIBOR options. As of March 31, 2013 , $43 million was drawn under the revolving credit facility and $125 million was outstanding on the term loan. No letters of credit were issued and outstanding under the Credit Facility at March 31, 2013 . See Subsequent Events, Note 20, herein for further information on our Credit Facility.
We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by subsidiaries, each of which (except for the Trust, which is a single purpose entity that holds our 7% debentures issued in connection with the issuance of the Trust’s term income deferrable equity securities (TIDES) 7% convertible preferred securities) have fully and unconditionally guaranteed our obligations under the Credit Facility. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the Credit Facility.
We were in compliance with the covenants contained in the Credit Facility as of March 31, 2013 . The Credit Facility calls for key ratios that we must comply with including a requirement to maintain a leverage ratio of no more than 3.75 to 1.00 through June 29, 2014 and no more than 3.50 to 1.00 thereafter, and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of March 31, 2013 , the leverage ratio was 3.03 to 1.00 and the fixed charge coverage ratio was 2.41 to 1.00.
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. These notes bear interest at 0% , discounted at imputed interest rates ranging from 8.50% to 9.50% , with original maturities from one to ten years .
13.
COMMITMENTS AND CONTINGENCIES
Litigation
We are a party to various litigation matters and proceedings. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. We intend to defend ourselves in the lawsuits described herein. If we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters.
Leathermon, et al. v. Grandview Memorial Gardens, Inc., et al. , United States District Court, Southern District of Indiana, Case No. 4:07-cv-137. On August 17, 2007, five plaintiffs filed a putative class action against the current and past owners of Grandview Cemetery in Madison, Indiana, including our subsidiaries that owned the cemetery from January 1997 until February 2001, on behalf of all individuals who purchased cemetery and burial goods and services at Grandview Cemetery. Plaintiffs are seeking monetary damages and claim that the cemetery owners performed burials negligently, breached Plaintiffs’ contracts and made misrepresentations regarding the cemetery. The Plaintiffs also allege that the claims occurred prior, during and after we owned the cemetery. On October 15, 2007, the case was removed from Jefferson County Circuit Court, Indiana to the Southern District of Indiana. On April 24, 2009, shortly before Defendants had been scheduled to file their briefs in opposition to Plaintiffs’ motion for class certification, Plaintiffs moved to amend their complaint to add new class representatives and claims, while also seeking to abandon other claims. We, as well as several other Defendants, opposed Plaintiffs’ motion to amend their complaint and add parties. In April 2009, two Defendants moved to disqualify Plaintiffs’

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counsel from further representing Plaintiffs in this action. On June 30, 2010, the Court granted the Defendants’ motion to disqualify Plaintiffs’ counsel. In that order, the Court gave Plaintiffs 60 days within which to retain new counsel. On May 6, 2010, Plaintiffs filed a petition for writ of mandamus with the Seventh Circuit Court of Appeals seeking relief from the trial court’s order of disqualification of counsel. On May 19, 2010, the Defendants responded to the petition of mandamus. On July 8, 2010, the Seventh Circuit denied Plaintiffs’ petition for writ of mandamus. Thus, pursuant to the trial court’s order, Plaintiffs were given 60 days from July 8, 2010 in which to retain new counsel to prosecute this action on their behalf. Plaintiffs retained new counsel and the trial court granted the newly retained Plaintiffs’ counsel 90 days to review the case and advise the Court whether or not Plaintiffs would seek leave to amend their complaint to add and/or change the allegations as are currently stated therein and whether or not they would seek leave to amend the proposed class representatives for class certification. Plaintiffs moved for leave to amend both the class representatives and the allegations stated within the complaint. Defendants filed oppositions to such amendments. The Court issued an order permitting the Plaintiffs to proceed with amending the class representatives and a portion of their claims; however, certain of Plaintiffs’ claims have been dismissed. Discovery in this matter will now proceed. We intend to defend this action vigorously. Because the lawsuit is in its preliminary stages, we are unable to evaluate the likelihood of an unfavorable outcome to us or to estimate the amount or range of any potential loss, if any, at this time.
14.
STOCK-BASED COMPENSATION
Stock Options and Employee Stock Purchase Plan
No stock options were awarded during the first quarter of 2013. As of March 31, 2013 , there were 283,258 stock options outstanding and 110,124 stock options which remain unvested.
During the first quarter of 2013 , employees purchased a total of 22,027 shares of common stock through the employee stock purchase plan (“ESPP”) at a weighted average price of $11.43 per share. We recorded pre-tax stock-based compensation expense for the ESPP and for stock options totaling $97,000 and $146,000 for the three months ended March 31, 2012 and 2013 , respectively.
The fair value of the right (option) to purchase shares under the ESPP is estimated on the date of grant ( January 1, 2013 ) associated with the four quarterly purchase dates using the following assumptions:
 
2012
 
2013
Dividend yield
1.7
%
 
0.6
%
Expected volatility
32
%
 
31
%
Risk-free interest rate
0.02%, 0.06%, 0.09%, 0.12%

 
0.08%, 0.12%, 0.135%, 0.15%

Expected life (years)
0.25, 0.50, 0.75, 1.00

 
0.25, 0.50, 0.75, 1.00

Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of grant ( January 1 ). The expected life of the ESPP grants represents the calendar quarters from the grant date ( January 1 ) to the purchase date (end of each quarter).
Common Stock Grants to Officers and Key Employees
We, from time to time, issue shares of restricted common stock to certain officers and key employees from our stock benefit plans. The restricted stock shares issued to officers and key employees vest in 33.33% increments over three year periods. Related to the vesting of restricted stock awards previously awarded to our officers and employees, we recorded $240,000 and $313,000 in pre-tax compensation expense, included in general, administrative and other expenses, for the three months ended March 31, 2012 and 2013 , respectively.
As of March 31, 2013 , we had $2.3 million of unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately 1.7 years .

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Performance-based Stock Awards
During the third quarter of 2012, the Compensation Committee of our Board of Directors (our “Board”) approved the grant of performance awards with both market and service vesting conditions to certain officers, employees and outside directors. The awards vest and become exercisable only in the event the closing price of our common stock is greater than or equal to $21.50 on any three days, whether or not consecutive, within a period of 30 consecutive calendar days, and the grantee remains continuously employed by us from the grant date through such date, which can be no earlier than the first anniversary of the grant date. If the market condition is met prior to the first anniversary of the grant date, then such award will not become vested until the first anniversary of the grant date, provided that the grantee remains continuously employed by us from the grant date through the first anniversary of the grant date. Promptly following the date a grantee’s award becomes vested (but no later than March 15th of the year following the year in which the award becomes vested) and subject to the grantee’s payment of the purchase price, we will issue and deliver to the grantee the number of shares of our common stock subject to the award. The purchase price is equal to the greater of (a) the fair market value of a share of our common stock on the grant date plus $0.50 or (b)  $9.00 . A grantee’s award will automatically terminate without payment of any consideration if (i) the grantee’s employment with us terminates for any reason (other than due to death or disability) prior to the vesting or (ii) the vesting does not occur on or before the fifth anniversary of the grant date. No performance awards were granted during the first quarter of 2013. The pre-tax compensation expense associated with these awards for the three months ended March 31,   2013 was approximately $169,000 .
Director Compensation Policy
On March 5, 2012 , our Board approved a new Director Compensation Policy, which provides for the following: (a) the chairman of our Audit Committee receives an annual cash retainer of $17,500 , the chairman of our Compensation and our Corporate Governance Committees receives an annual cash retainer of $15,000 ; and the Lead Director of our Board receives an annual cash retainer of $115,000 , payable in quarterly installments; (b) each independent director of our Board receives an annual cash retainer of $40,000 paid on a quarterly basis and an annual equity retainer of $75,000 in shares of our common stock issued at our annual meeting of stockholders. Additionally, each independent director receives $2,000 for each regular or special meeting of the full Board, our Audit Committee and our Executive Committee attended in person or by phone. Members of the other committees and their chairmen receive $1,600 for each committee meeting held in person or by phone that such director attends. Under our Director Compensation Policy, the annual cash retainers for each committee chairman and the annual equity retainer are paid on the date of our annual meeting of stockholders, which for this year will be held on May 22, 2013 .
We recorded $161,000 and $133,000 in pre-tax compensation expense, included in general, administrative and other expenses, for the three months ended March 31, 2012 and 2013 , respectively, related to the director fees, annual retainers and deferred compensation amortization.